6 Successful Money Management Habits for Bad Credit Loan Borrowers

One of the top challenges of personal finance is navigating and managing bad credit loans responsibly. With shorter repayment terms and higher than average APRs of up to 35.99%, a  $5,000 bad credit loan can bump your debt-to-income ratio to the 50% range if you are not careful, so you will need to develop effective money management habits to keep you on top of your monthly bills.

Keep reading to learn more about six successful money management habits for bad credit loan borrowers, including what quick loans for bad credit are, their drawbacks, and six highly effective strategies for reducing the likelihood of loan default and falling into a debt cycle. 

What Is a Bad Credit Loan?

Long a staple in the financial industry, bad credit loans are tailored to those with less than ideal credit scores in the 300 to 580 range, who have difficulty qualifying for traditional 8% to 11% APR loans from banks, credit unions, and other direct lenders.

Characteristics of legit bad credit loans include APRs of up to 35.99%, short repayment terms up to several months, and no extra charges like origination or prepayment penalties. 

Another characteristic is less stringent approval criteria, with eligibility based on factors beyond credit scores, such as your income and employment record (e.g., a minimum consecutive three months of employment with the same employer with paycheck direct deposits into a bank account).

Thanks to looser eligibility requirements, non-full-time workers such as gig workers, part-time workers, freelancers, and the self-employed can apply for bad credit loans. Pensioners and those collecting government benefits, such as Social Security and disability, can also apply.

Potential Issues with Bad Credit Loans

Here are all the potential issues with bad credit loans:

Short Repayment Terms. Thanks to the faster repayment terms offered by credit loans, it often leads to higher monthly payments that may be difficult for borrowers to repay with a lack of strategy. A compressed timeline equals a greater likelihood of missed payments, potentially negatively impacting your credit score. 

At the same time, the longer the repayment term, the higher the total interest charges paid, so shorter repayment terms could be a blessing in disguise. 

Remember, 35% of your FICO score accounts for payment history, so every on-time payment counts. 

Dinged Credit Score. One late payment significantly affects your FICO score, and the exact impact depends on variables such as your credit history, date of last delinquency, and other factors. Late payments are usually reported to credit bureaus (Equifax, Experian, and TransUnion) past the 30-day mark, with less of an impact the longer and more positive your credit history goes. 

Another factor that can affect your score outside of late payments is credit utilization ratio. If you take out a paycheck advance or personal loan for bad credit and it blows your DTI past 40%, you can expect your score to suffer. We always recommend paying the outstanding balance by the end of the first month to avoid any interest charges. 

Predatory Lending Practices. Predatory lending practices are only out of the question if you carefully digest all of the fine print to vet your third-party lender. Excessively high penalties, requests for upfront payments, and a lack of transparency with rates and terms all plague unscrupulous borrowers. 

Always read the fine print and verify your third party lender by typing their name into Google and reading third-party reviews vociferously, preferably from TrustPilot, Better Business Bureau, and other reputable sites. 

APRs up to 35.99%. Annual percentage rates (APRs)  reflect the total cost of borrowing for any loan opportunity, including interest and finance charges. For example, a 35.99% APR on $100 borrowed would equate to $35.99 in total charges paid over one year. 

For perspective, a 35.99% APR $800 loan with a one-month repayment term and a $49 rollover fee will incur a total cost of borrowing of $872.99 ($823.99 towards principal and interest).

Be sure to adjust all your loan terms and conditions to fully understand the cost of borrowing and check for any hidden fees and penalties along with implications of late/insufficient payments and rollovers. 

Lower Loan Amounts. Bad credit lenders issue lower loan amounts to borrowers for several reasons, primarily due to a higher risk of default. Secured loans typically award higher loan amounts than unsecured loans, as an item of value of hedging any risk of default. 

Lack of Transparency (Sometimes). Opting for the wrong bad credit lender will open you up to hidden fees, requests for upfront payments, and the need for more transparency around non-payment implications and other loan conditions that are essential to know. Regrettably, not all direct lenders treat transparency the same. 

Fortunately, ways around it include ensuring a minimum of two communication methods (preferably phone and email), an actual physical address, and robust privacy policy and advertiser disclosures that let you know how third parties collect and share your data for promotional purposes. 

Remember to scour TrustPilot, the Better Business Bureau, independent review sources,  and other reputable third-party websites for a handle on consumer feedback and retention. 

Potential of Debt Cycle. Suppose you need to keep your credit utilization and debt-to-income ratio in check. In that case, a lack of discipline can make bad credit loans put you into a debt cycle with consecutive requests to renew them, collecting even more fees and interest. 

As with all those, be sure to carefully review all of the terms, including rates, fees, and implications of non-payment. You should always have at least two alternative options: a Buy Now, Pay Later service for larger e-commerce purchases and loan apps like Earnin and Brigit to cover paycheck gaps up to $750 per pay period. 

You can minimize your chances of entering a debt cycle by seeking the right financing at the right time. 

6 Tricks and Tips on How to Manage Bad Credit Loan Repayment

Here are six of our favorite tips and tricks and how to manage bad credit loan repayment:

Negotiate with Lenders

If you wish to negotiate alternative terms (e.g., change due dates or interest rates), you must establish an open line of communication with your direct lender. Not all direct lenders are available for discussions, but it’s worth a shot. 

Consider Debt Consolidation

One of the top strategies in managing bad credit loans is looking into debt consolidation. Debt consolidation combines multiple debts into a single loan to pay lower interest charges over time. This practice can apply to unsecured loans like credit cards,  personal loans, and other high-interest rate debt types. 

Set Up Automatic Payments

We recommend implementing automatic payments using  your checking account. Try scheduling automatic transfers on or before the 25th of every month or when most of your bills are paid. Regarding personal finance, this strategy represents the epitome of “out of sight, out of mind.”

We also recommend that you apply this to your regular ongoing investments. By reallocating a portion of your bi-weekly paycheck to a high-yield savings account, money market fund/s, or index fund/s,  you’ll be on the fast track to a healthy retirement with the power of compounding interest and dividend earnings. 

Consider Debt Forbearance or Hardship Programs

If you are with a direct lender that offers it, enroll in credit counseling or debt management plans. Some debt management plans (DMPs) allow you to negotiate interest rates and payment terms with creditors to simplify the repayment and avoid your chances of entering loan default. 

These programs also allow borrowers to pause or reduce loan payments until they can escape financial hardship. Others, like settlement programs, will enable you to settle with lenders for less than the total amount owed, usually brokered by a third party for a small fee (although you can negotiate this yourself with a little legwork). 

Focus on Budgeting

The hallmark of solid personal finance is keeping your monthly budgeting in order. A detailed budget that lists your income and outgoing fixed variable expenses like rent, utilities, and Spotify subscriptions. From there, work on a spending strategy such as the 50/30/20 method, where 50% of your gross income goes towards needs, 30% towards wants, and 20% towards mid to long-term Investments and savings accounts like 401ks, IRAs, and emergency funds. 

Keeping your monthly budgeting in order reduces the chances of defaulting on any bad credit loan,  especially with shorter repayment periods and higher monthly payments. 

Negotiate Loan Terms

Do not underestimate the power of negotiations with any loan. Although you may have bad credit, many lenders may be open to discussing a modified repayment plan, which can mean extending the loan term or lowering monthly payments temporarily. At the same time, you can  get back on your feet. Many even offer temporary forbearance programs that allow you to pause or reduce costs for up to a year. 

Additionally, you want to focus on the flip side. If you have an improved financial situation since taking out a bad credit loan, make a case for modified terms by calling out your new source of income or other life circumstances that will demonstrate to lenders that you can repay the loan quicker and easier. 

Frequently Asked Questions

How do I build an emergency fund?

We highly recommend setting up automated transfers or checking/money market accounts to build an emergency fund to pay for unexpected expenses caused by financial hardships like unemployment or short/long-term disability. 

Aim for at least three to six months’ worth of living expenses. Any windfalls like tax refunds or work bonuses could contribute a small percentage towards your emergency fund, with the rest towards your needs and wants. 

Therefore, regularly reviewing your fixed and variable expenses is essential to determine if surplus money can be redirected to your emergency fund.

Do bad credit lenders offer hardship programs?

Bad credit lenders rarely offer hardship programs that allow you to defer payment, reduce interest rates, or waive fee waivers. This is more a hallmark of traditional banks, credit unions, and some online lenders. 

To take advantage of hardship programs, we recommend you boost your credit score in the Excellent to Very Good range so that you can open up loan opportunities beyond bad credit lenders. However, we hope you do not have to join this type of program in the first place!

What are the eligibility criteria for bad credit loans?

At a minimum, you must be at least 18 or older with proof of stable income and a valid bank account for funds to be sent to you. As for work, you could be a part-time, full-time, self-employed, freelancer, or gig worker, just as long as you’re earning the minimum monthly income with pay stubs, electronic timesheets, or geo-location tracking to prove employment (depending on the provider). 

However, remember that some loan apps like Earnin require access to a direct deposit collecting bank account. 

What is the 50/30/20 rule? 

The 50/30/20 rule is one of our favorite strategies for budgeting. Essentially, this strategy asks that you separate your after-tax income into three buckets, which are needs, wants, and savings/debt repayment. 

50% of your after-tax income should go towards needs versus 30% for wants and 20% for savings and debt repayment. The last 20% should be focused on your 401k, IRA (or any other retirement investment) and emergency funds with at least three to six months’ worth of expenses to back you up in terms of financial hardship.

Feel free to tweak any of the above percentages as needed based on your objectives.

What is the debt avalanche and snowball method?

The debt avalanche and snowball methods are two of the most popular ways to pay down debt. One focuses on paying off your highest interest rate balances first, whereas the other focuses on paying off the smallest balance first, arguably providing greater psychological benefits. 

Deciding between each strategy depends on your individual preferences. Remember, the best strategy is the one you’re most consistent with, similar to a diet or exercise regimen. 

Conclusion

In short, adhering to our recommended six successful money management habits if you have bad credit will lead to improved budgeting and savings for emergencies. By repaying your debts strategically, expect your monthly budgeting skills to slowly ramp up over time, allowing you to enjoy much improved financial health. 


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